Posted by Carl Icahn June 15, 2008 : 5:00 PM
With a staggered board, board members are grouped into classes. Each class typically represents about a third of the total number of directors, and only one class comes up for election in a given year, thus assuring that it will take more than one costly proxy fight to gain a majority of the board seats. An activist shareholder attempting to effect change at a company that has a staggered board has to mount, finance and win at least two very costly proxy contests over a period of at least two years to gain a majority of the board seats. Even if the activist has the support of the majority of shareholders, the activist would still need to work through two hard years to obtain control of the board.
To make matters worse, under Delaware’s General Corporation Law which governs the majority of public companies, directors on a staggered board can only be removed for cause unless the certificate of incorporation provides otherwise, which it never does. This is true even if a majority of the shareholders want to replace the existing board.
If a company has a staggered board it is nearly impossible to change control of that company in less than two years. But as we all know, two years in the life of a poorly managed company is an eternity. Although this is not a problem unique to United States markets it is by no means universal. In many countries the ability of shareholders to call a meeting and remove and replace directors is enshrined in the local law of the jurisdiction. This prevents the stagnation and abuse of shareholders that a staggered board can promote.
It is time for all public U.S. companies to be governed by a policy that allows significant shareholders to call a meeting at which the entire board can be removed and replaced by the vote of a majority of the quorum. This sensible policy would be a major step in the right direction to promote shareholder democracy and would put the United States on par with other countries that value the efficient management of critical engines of their economies---public corporations-- over the interest of entrenched managements.
Something can and should be done. We need to let our Washington representatives know how critical these issues are to shareholders. We need to make management and boards accountable. We need… change.